Short Sales Not Just About Cancelling Mortgage

Short Sales Not Just About Cancelling Mortgage

We're hearing a lot about short sales these days. The key words in the Multiple Listing Systems around the country are "third party approval required," or "bank approval required," which is a signal that the property you're looking at is actually being sold by the mortgage holder rather than the deed holder.

Before you get involved in one of these transactions, understand what they are not: a short sale is not simply a sale of a property for less than the original purchase price. It is not necessarily a "pre-foreclosure." It is not always a good deal.

What a short sale is: A short sale is a pre-foreclosure only in the fact that the lender has decided to receive payment on the note for less than the face amount. The sellers have determined there's no way they are going to get as much for the house as they owe and they can't stay in the property for one reason or another. The terms of such sales will differ lender to lender. Some require that the owners demonstrate they can't afford the house (that they're broke, in essence) and that there's no money to bring to the table to make up the difference.

It's a sticky situation for the sellers/owners. They don't want to hurt their credit or go into foreclosure, but they have to move because they've been transferred, lost a job, took a new job or are overextended, but they don't have the cash to pay the marketing costs, closing costs and pay off the mortgage.

Short sales are real diamonds. I've seen some that look great -- offering closing costs, aggresive pricing, and selling bonuses -- just to get the house off the books.

Conversely, they can also be some of the toughest deals to get through to settlement if the lender has lost too much money already and just wants to wait out the buyers until one comes along who's willing to buy the house in disrepair with no closing costs.

If you're writing a contract on a short sale here are a few tips to keep in mind:

Be patient. Because of the current default situation on mortgages, the lenders are inundated with many of these type properties. You're offer is one of many and the processor will get to it in turn. Don't expect a response in a day -- maybe not even two to three days. Sometimes a week is not out of the ordinary. Putting in language such as "response required within 24 hours," may just be a waste of time, rather than a stimulus to get a faster response.

A good comparative market analysis is imperative. Be sure to hit the price right on the head and offer close to it. Most lenders have already lost enough money, they don't want to lose more with a really low offer. If it's overpriced, then offer right at the CMA amount. But if it's right on, offer the full price.

Pile on the contingencies. This works well if you're writing a full price offer. Those would include inspections (home, pest, radon, etc.); appraisal; financing; etc. Ask for a lot and expect nothing.

Be on top of your walk through. Most short sales don't like home inspections, thus be aware of the condition of the property. If possible, test all the systems (electrical, plumbing, heating/air). This is as simple as flushing toilets, using a socket tester (available at hardware stores); and turning on the furnace/heater/air. You may even want to turn on the washing machine and dishwasher -- but ask the listing agent beforehand.

If you're on the selling side of a short sale, keep in mind you're not the one in control anymore. The buyer/agent is going to be dealing with the listing agent and the lender more than anyone else. You may want to be involved in the sale, but you're mainly there to agree to the terms set forth by the lender. Sign the paper work. Move your stuff -- out. They want their money and your home is the only thing standing in the way.

So you're out of trouble, right? Not so fast. The bank could come after the rest of the balance separately from the sale, just like they can with a foreclosure. On top of that, any cancellation of debt above $600 is supposed to be reported as income to you through Form 1099-C (Cancellation of Debt) to the IRS. For instance, let's say you sell your house for $30,000 less than you owe, that 30-grand could be additional income the IRS will want to tax.